Willfulness in trust fund penalty must be determined at trial

In a summary judgement, a district court has concluded that a taxpayer who was vice-president, board member, and shareholder of his family-run company was a responsible person for purposes of the Code Sec. 6672 trust fund recovery penalty. However, the district court found that whether the taxpayer, who played a perfunctory role in his company, willfully failed to pay over withholding taxes was an issue of fact to be decided at trial.

Sheila and Robert Nipper, husband and wife, were the founders of Ruah Enterprises, Inc. (Ruah Enterprises), a hospice and home health services company. Sheila was Ruah Enterprises' president, and Robert was its vice-president. Ruah Enterprises was a family affair. Sheila's children and Robert's step-children were Ruah Enterprises' chief financial officer (CFO) and treasurer. Their child was its secretary.

Robert was also on Ruah Enterprises' board of directors, and regularly attended board meetings. He owned 29% of the company (Sheila owned 51%). He advised his wife on employee matters, was a signatory on all Ruah Enterprises checking accounts, and signed at least a few loans, leases, and financing statements on Ruah Enterprises' behalf. He also had a lien placed on his personal property by a Ruah Enterprises' creditor. From 2000 to 2002, he received an average salary of $42,000 from Ruah Enterprises. In '99, he had been self-employed as a landscaper, but after '99, his role at Ruah Enterprises was his only employment.

From its inception in '99 to 2003, Ruah Enterprises withheld its employees' income taxes and the employees' portion of FICA and Medicare taxes from its employees' paychecks. However, none of these withheld funds were ever remitted to the government.

Robert argued that he was vice-president in name only, and had no actual role in the running of the business. He argued that he was a signatory on checking accounts simply as a matter of form, but that in reality he did not sign checks or any other documents without Sheila's authorization. The few documents Robert did sign were only at Sheila's request when she was unavailable. He maintained that he wasn't informed of Ruah Enterprises' failure to pay taxes until the end of 2002 or beginning of 2003.

IRS argued that Robert was a responsible person because he: (1) was a board member and was authorized to manage Ruah Enterprises' business and affairs by its articles of incorporation, and to hire individuals to manage the day to day affairs; (2) regularly attended board meetings; (3) owned 29% of Ruah Enterprises; (4) received approximately $40,000 per year in salary; (5) had authority as a signatory on the company banking accounts to write checks; (6) had authority to sign financing contracts and loans on the company's behalf; (7) took out a personal loan for the use of the company; and (8) provided advice to Sheila on employee matters.

In addition, IRS argued that Robert acted willfully because he proceeded with reckless disregard of an obvious risk that Ruah Enterprises' payroll taxes weren't being paid to the government. As an officer of the company, he disregarded the imprudence of entrusting all financial affairs of a company with many employees to the CFO, a young relative with no college education or other qualifications, without providing any supervision. Further, Robert disregarded the unaccounted-for additional $230,000 per year that was available to the company because of its failure to remit that amount to the government.

The district court concluded that Robert was a responsible person under Code Sec. 6672. The court reasoned that the existence of authority in the general management and fiscal decision making of the corporation, irrespective of whether that authority was actually exercised, was determinative. While Robert argued that he did not exercise his authority, except occasionally and at Sheila's request, he could and should have paid the company's taxes. Robert was in a position where he could have ensured that the taxes were paid. He did not do so.

The district court, denying IRS's request for summary judgment on this issue, found that it had not been shown that Robert willfully failed to pay over the withholding taxes. The court concluded that while Robert's neglect of any responsibility or duties in managing the company was likely negligent, there was a dispute of material fact as to whether it rose to the level of reckless disregard in order to satisfy the second requirement for Code Sec. 6672 liability.

While Robert's lack of involvement didn't prevent him from being a responsible person, it was relevant to whether he acted willfully. IRS didn't provide uncontested facts on how sophisticated a business manager Robert was. The district court knew only that Robert knew nothing about his wife's field of home healthcare, and that he was self-employed as a landscaper in '99. These facts did not provide convincing proof that he was a sophisticated business manager who should have had a clear view of the concerns of a large business and his responsibilities.

While IRS provided evidence that Robert was informed of the failure to pay taxes, he provided contrary evidence that he wasn't so informed until the end of 2002 or beginning of 2003.

In a summary judgment motion, the district court said it had to make all permissible inferences of fact in Robert's favor.